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Sterling drops as manufacturing slows

British Sterling has fallen sharply against the US dollar after growth in manufacturing sector fell markedly in April.

Markit a financial data company,  said its monthly Purchasing Managers’ Index (PMI) for manufacturing fell from 54 in March to 51.9 in April.

Although a figure more than 50 still indicates expansion, the fall is the biggest since February 2013.

The pound is down more than 2 cents, or 1.4%, to $1.5139.

Sterling also dropped against the euro to €1.352.

Companies complained the strength of the pound with the euro was affecting competitiveness in the eurozone.

The Markit survey came after the release of official figures on Tuesday that showed the UK’s economic growth rate halved to 0.3% in the first quarter of 2015.

A senior economist at Markit, Rob Dobson, said: “Today’s UK PMI delivered less-than-positive news on the health of the manufacturing sector.

“Any signs of rebalancing the economy towards manufacturing and exports remain frustratingly elusive.”

Survey hits sterling

The survey revealed that new export orders fell at the quickess rate since January 2013, job creation was “modest”, and manufacturers reduced prices at their fastest rate in almost six years.

In recent months, the pound has increased in value against the euro. In March, it was at its highest level compared with the single currency in 7 years, making UK goods being more expensive in the eurozone.

During the same period, sterling has dropped against the dollar, and the survey said prices paid for goods priced in dollars had increased.

David Tinsley, an economist at UBS, said: “The source of the drop [in the PMI] may be an indicator that the appreciation of sterling against the euro is having an impact on UK manufacturing competitiveness.

“One would hope that as the upswing in the eurozone gains traction demand may begin to compensate for the currency move, but it’s a reminder that monetary policy will need to be sensitive to the pound.”

However, chief economist at EEF, the manufacturers’ organisation, Lee Hopley, said: “It would be premature to write off manufacturing’s contribution to growth in the future, not least because continued employment growth points to some confidence about longer-term prospects.”

Interest rates to be reduced

UK interest rates are as likely to fall further as to rise, claims a chief economist of the Bank of England

Speaking in a personal capacity, Andy Haldane – a member of the Bank’s Monetary Policy Committee (MPC) – said he could not see a move in either direction.

BBC economics editor Robert Peston referred to the comments as “big stuff”.

In March 2009 UK interest rates were reduced to 0.5% and have remained at that level ever since.

In February, the Bank changed its advise and hinted that rates could be reduced further if the economy needed additional stimulus.

Up till then, most commentators and investors had assumed that a rate rise was most likely occur late this year or early next.

But Mr Haldane said that if an algorithm set rates rather than the MPC, then “the optimal path for interest rates would involve them being cut in the short-run towards zero for around a year”.

Sterling dipped sharply against the US dollar following the comments – at one moment in late afternoon trading, it was 1.5% lower at $1.4738.

Low inflation

The low-rate environment has been a result in part of consistently slow economic growth, said Mr Haldane, speaking at a business lunch in Rutland.

“Over the past two years, this story has subtly changed,” he said, with UK growth tougher than expected.

Despite this, “inflation has consistently and significantly undershot the Bank’s forecasts since 2012, in particular over the past 12 months,” he said.

The MPC holds the view that UK inflation – currently at a record low of 0.3% – will remain close to zero in the near-term, before increasing over two years to the government’s inflation target of 2%.

Mr Haldane said: “The risks to inflation at that horizon are plainly two-sided. But my personal view is that these risks are skewed to the downside.”

The low-inflation portrait is mirrored globally, with 40 countries actually experiencing deflation.

The falling oil price has contributed to this effect, he said, as have falling agricultural commodity rate and low wage growth.

House prices fell in February 2015

UK house prices dropped in February for the first time in over four months, according to research by Nationwide.

Average house prices dropped 0.1% from £188,446 in January 2015 to £187,964, said the UK’s 2nd biggest mortgage lender.

Yearly house price growth slowed for the sixth month in a row to 5.7%, its lowest since September 2013.

House prices have fallen despite of the UK’s improving economic outlook and access to low interest rates.

“Mortgage rates remain close to all-time lows and consumer confidence remains buoyant thanks to a further steady improvement in labour market conditions,” said Robert Gardner, Nationwide’s chief economist.

Figures obtained from the Bank of England, also published on Monday, showed that the number of mortgages approved for house purchases went up in January.

There were 60,786 home mortgages approved. Despite the rise from 60,349 approvals in December, the total remained below the average of the previous 6 months.

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